When you have more than one business loan offer, the lowest headline number is not always the cheapest. Lenders quote prices differently, stack fees in different places and set very different repayment schedules. Here is how to line offers up so you can compare the real cost and the real risk.
Flex Fuel does not promise funding or approvals. This article is general education, not financial, legal or tax advice. Lender terms vary, so read every contract carefully.
Why business loan offers are hard to compare
When you shop for a home loan, every lender has to give you the same standardized Loan Estimate. Business credit is different. The federal Truth in Lending Act does not apply to credit extended primarily for business, commercial or agricultural purposes, so business lenders do not all present their pricing in one common format. One offer may show an interest rate, another an APR and another a factor rate.
The SBA's guide to funding your business puts it simply: once your materials are ready and you request loans from banks and credit unions, you will want to compare offers to get the best possible terms.
Interest rate vs. APR vs. factor rate
These three numbers are not interchangeable.
- Interest rate: The CFPB describes the interest rate as the cost you pay each year to borrow money, expressed as a percentage. It does not reflect fees or other charges.
- APR (annual percentage rate): The CFPB calls APR a broader measure of the cost of borrowing, because it reflects the interest rate plus points, broker fees and other charges. That is why APR is usually higher than the interest rate. The CFPB's explanation is written for mortgages, but the idea carries over: ask each business lender for the APR, or at least for every fee, so you can see the full cost.
- Factor rate: Common with merchant cash advances and some short-term products, a factor rate is a multiplier applied to the amount you receive. A 1.2 factor on $50,000 means you repay $60,000. Because the fee is fixed up front, a factor rate is not the same as an interest rate, and a short repayment period can make the effective cost much higher than the number suggests. Our guide to merchant cash advances vs. business loans goes deeper.
Fees that change the real cost
Ask every lender for a written list of fees. Common ones include:
- Origination or underwriting fees, often taken out of the loan amount, so you receive less than you borrow.
- Packaging, closing or documentation fees.
- Prepayment penalties. The CFPB defines a prepayment penalty as a fee some lenders charge if you pay off all or part of a loan early. With fixed-fee products, paying early may not save you anything, so ask how early payoff works.
- Late fees and returned-payment fees.
Term, payment frequency and cash flow
A longer term usually means smaller payments but more total interest; a shorter term means the opposite.
Some products debit your account daily or weekly instead of monthly, so map every payment schedule against your real cash flow before you sign. Lenders look at the same thing; our explainer on the debt service coverage ratio shows how they measure whether your business can carry the payment.
Worked example: total cost of capital
This is a hypothetical example with made-up numbers for illustration only. It is not a quote or a typical offer.
Say a business is comparing two ways to get $50,000:
| Offer A: term loan | Offer B: factor-rate advance | |
|---|---|---|
| Amount | $50,000 | $50,000 |
| Pricing | 10% interest rate | 1.2 factor rate |
| Upfront fee | 3% origination ($1,500) | None |
| Term | 12 months | About 6 months |
| Payments | 12 monthly payments of about $4,396 | 126 business-day debits of about $476 |
| Total repaid | About $52,750 | $60,000 |
| Total cost (interest + fees) | About $4,250 | $10,000 |
The math for Offer A: a 12-month amortizing loan at 10% works out to roughly $2,750 in interest, plus the $1,500 fee, for about $4,250. Offer B costs $10,000 for six months of use. The headline "1.2" looks small, but in this example it costs more than twice as much in dollars, in half the time, with a payment hitting the account every business day. Also notice that Offer A's 3% fee means the business may receive $48,500, not $50,000.
To run your own comparison, add up every payment, subtract what you actually receive and weigh that total cost alongside the payment schedule.
Collateral, personal guarantees and UCC filings
- Collateral: Ask what assets secure the loan. Some lenders take specific equipment or real estate.
- Personal guarantee: Many small business loans require one, which means you can be personally responsible if the business cannot pay. Read our guide to personal guarantees on business loans.
- UCC lien: Lenders often file a UCC financing statement, sometimes covering all business assets. Our post on UCC filings and blanket liens explains how that can affect future borrowing.
Two offers with the same cost can carry very different risk.
Questions to ask every lender
- What is the APR, and can you show every fee in writing?
- How much will I actually receive after fees?
- What is the total amount I will repay if I make every payment on schedule?
- How often are payments due, and how are they collected?
- Is there a prepayment penalty, or any savings for paying early?
- What collateral, personal guarantee or UCC filing is required?
- Is the rate fixed or variable?
- Does the lender report payments to business credit bureaus? Building a payment history can matter; see our guide to the PAYDEX score.
If you have trouble getting a traditional loan, the SBA notes that SBA-guaranteed loans exist for situations where a bank sees the business as too risky, and its Lender Match tool connects owners with participating lenders. Our SBA loan prep guide covers that path.
Before you request offers, check your own credit
Many lenders review the owner's personal credit along with the business's records. Flex Fuel clients use SmartCredit to see their credit reports and scores in one place before they apply, and our guide to checking business credit for errors covers the business side.
Holding more than one loan offer? Book a time to go over the terms, your credit and your cash flow with us.
How Flex Fuel helps
Flex Fuel works with business owners nationwide (we are based in Atlanta) to get funding-ready: reviewing personal and business credit, organizing documents and helping you understand the terms in front of you. We do not make lending decisions or broker loans. Explore our services and see how our guarantee works.
Weighing more than one business loan offer? Book a complimentary strategy session. We will review your credit and readiness with you and map out your next steps.
Book a Consultation ›Frequently asked questions
Is the lowest interest rate always the cheapest business loan?
No. Fees, term length, payment frequency and prepayment rules all change the total cost. Compare the total amount you will repay against the amount you actually receive.
What is the difference between a factor rate and an interest rate?
A factor rate is a fixed multiplier on the amount you receive, set up front. An interest rate is an annual cost of borrowing. A factor rate over a short term can cost far more than it appears.
Do business lenders have to show an APR?
Not under the federal Truth in Lending Act, which does not apply to credit extended primarily for business purposes. Other rules can vary, so ask each lender to show the APR and every fee in writing.
What should I compare besides cost?
Compare collateral, personal guarantees, UCC filings, payment schedule and credit reporting.
